Chapter 1
Primary Matching Funds

How the Matching Fund System Works

Partial public funding is available to Presidential primary candidates
in the form of federal matching payments. Candidates seeking their party's
nomination to the Presidency can qualify to receive matching funds by raising
over $5,000 in each of 20 states (i.e., over $100,000). Only contributions
from individuals apply toward this threshold. Although an individual may
contribute up to $1,000 to a candidate, only a maximum of $250 counts toward
the threshold and is matchable.1

Primary election candidates seeking matching funds must also submit a
letter of agreements and certifications. This document is a contract with
the government. In exchange for public funding, the candidates promise to
comply with the provisions of the Federal Election Campaign Act and the
Presidential Primary Matching Payment Account Act. As part of this agreement,
candidates pledge to limit national spending for all primary elections and
to limit spending in each state based on its voting age population.2 Moreover, candidates must agree not to spend more
than $50,000 of their personal funds in connection with the campaign.3 The candidates must also facilitate an audit
of their campaigns and make any necessary repayments (see
below).

Once the Commission determines that a candidate has met the eligibility
criteria, he or she may submit contributions from individuals for matching.
The Commission's audit staff reviews these submissions to see if the requests
meet the standards for matchability. The contributions, for example, must
be in the form of a check or other negotiable written instrument made payable
to the candidate or his or her campaign committee. Once the Commission is
satisfied that the submissions comply with the law, it certifies to the
U.S. Treasury an amount due the candidate.4

Candidates may present documentation to establish their eligibility for
matching funds and submit matchable contributions during the year before
the election is held. The first payments, however, are not made until January
of the election year. From that point forward, candidates may submit additional
matching fund requests and receive payments on a monthly basis. Even if
a candidate is no longer actively campaigning in primary elections, he or
she may continue to request matching funds to pay off campaign debts and
to wind down the campaign until early in the year following the election.5

The maximum amount of matching funds a candidate may receive is limited
to half of the overall spending ceiling.6

After the campaign, the Commission audits
each candidate's committee to ensure that funds were not misused and that
the committee maintained proper records and filed accurate reports.7

At the conclusion of a fieldwork audit, FEC auditors hold an exit conference
to discuss preliminary findings with the committee. Later, these findings
are incorporated into an interim audit report. Interim reports are reviewed
by the Office of General Counsel and approved by the Commission before being
sent to the committee treasurer. The committee may dispute the findings
contained in the interim audit report.8

The Commission considers final audit reports in open meetings and then
releases the approved final report to the public. The final report may include
an initial determination by the Commission that the committee repay funds.9

A repayment may be required if the Commission determines that a committee:

Received public funds in excess of the amount to which it was entitled
(e.g., received matching funds for contributions that were later determined
to be nonmatchable or received amounts beyond that necessary to pay campaign
debts);

Had surplus funds remaining on the date of ineligibility; or

Incurred nonqualified campaign expenses by spending in excess of the
limits, by using public funds for expenses not related to the campaign
or by insufficiently documenting the expenditure of public funds.10

The committee must repay only the portion of nonqualified campaign expenses
that were defrayed with public funds. A ratio formula is used to determine
the amount of the repayment.11

A committee may dispute the Commission's initial repayment determination
by submitting legal and factual materials to support its view. The committee
may also request an oral presentation before the Commission.12

The Commission will take into account the committee's arguments when
making its final repayment determination.13
The committee, however, must repay the amount specified in the final determination
within the payment deadline unless it obtains a stay from the Commission
pending an appeal of the agency's decision.14

Statistical Wrap-up

The charts that appear in this section provide statistical information
related to the Presidential primary election process. (NOTE: Charts
will appear in a new window.)

Issues

The Commission has faced a myriad of challenges while administering the
primary matching fund program. Having opened its doors after the 1976 campaign
had already begun, the Commission had to establish administrative procedures
and policies very quickly. Since that time, the Commission has refined these
procedures and policies to address changing circumstances and to find more
efficient ways of accomplishing its duties. The Commission has responded
to questions regarding the eligibility requirements, the expenditure limits,
the date a candidate becomes ineligible for payments and much more. This
section describes some of the most difficult and persistent challenges the
Commission has encountered, and the steps it has taken to address them.

Eligibility
In most cases, the Commission has had little difficulty determining whether
candidates qualify for primary matching funds. But questions regarding the
eligibility of certain minor party candidates and candidates who have violated
the election laws in the past have proven difficult.

Under the Act, the Commission is required to determine whether candidates
have met the eligibility criteria (described in the "How
the Matching Fund System Works" section) and, if so, to certify
the candidates eligible to receive matching funds. The Commission conducts
a 100 percent, item-by-item review of each eligibility submission to ensure
that the candidates have, in fact, met the $100,000 threshold. Despite the
labor-intensive nature of this review, Commission regulations specify that
these submissions be processed as quickly as possible, usually within 15
business days during the election year.15 The
Commission has been consistently successful in meeting this deadline, frequently
completing its review in less than 15 days.

While the Commission has received high marks for its administration of
this process, some observers have criticized the system for certifying so-called
"fringe candidates."16 These critics
contend that the eligibility threshold, which is not indexed to inflation,
has become too easy for candidates to meet.17
This, they argue, subverts the legislative intent that only candidates who
demonstrate broad-based support should qualify for public funding. The Commission,
for its part, has recommended that Congress raise the eligibility threshold
to correct the perceived inflationary distortions. (See
Appendix 2.)

Some observers are concerned, however, that raising the eligibility threshold
might discourage minor party candidates. This, they argue, would negate
the legislative intent to open the process to a wide variety of candidates.
Although the statute does require candidates to be "seeking nomination
by a political party" for President, there is no statutory distinction
drawn between various types of parties.18

Over the years, the Commission has been asked
to determine whether various third party candidates would qualify for matching
funds. To make such a determination, the Commission has examined whether
the candidate's party qualified as a "political party" under FEC
regulations.19 In Advisory Opinion (AO) 1983-47,
for example, the Commission found that the Citizens Party qualified because
it planned to hold a nominating convention and had a record of political
activity. As a result, the Citizens Party candidate (Sonia Johnson), having
met the other eligibility requirements, became the first third party candidate
to qualify for primary matching funds. In AO 1984-11, the Commission determined
that a candidate (Dennis Serrette) could also meet this eligibility requirement
by seeking the nomination of several independent parties organized in different
states.20

Critics contend that the Commission has been too lenient in granting
"political party" status, exacerbating the "fringe candidate"
problem, described above. Not only are more minor party "fringe candidates"
qualifying for matching funds, but these candidates also are often able
to maintain eligibility longer than some major party candidates. This occurs
as a result of the application of the 10 percent rule: Candidates become
ineligible for matching funds if they fail to receive 10 percent of the
vote in two consecutive primaries.21 Since
a minor party candidate is frequently unopposed for his or her party's Presidential
nomination, the 10 percent rule does not apply. Thus, the argument goes,
these "fringe candidates" maintain eligibility throughout the
primary campaign season, while certain major party candidates soon become
ineligible because they fail to receive 10 percent of the vote in two consecutive
elections.

On the other hand, the statute does permit candidates facing opposition
to notify the Commission that they would like to exclude particular primaries
from the 10 percent requirement and thereby maintain eligibility, despite
poor electoral performance.22 Some observers
view this as a statutory loophole benefiting major party candidates.

In some cases, candidates have attempted to establish eligibility for
matching funds after failing to receive more than 10 percent of the vote
in two consecutive primaries. The Commission has, nevertheless, certified
these candidates' eligibility, explaining that the 10 percent rule applies
only to elections held after a candidate becomes eligible for matching funds.23

The timing of an eligibility submission was at issue again in 1992. The
Commission certified John Hagelin's eligibility for matching funds, even
though he had become ineligible prior to the certification date. Since Dr.
Hagelin had made his threshold submission several weeks before his party
had nominated him (the date of his ineligibility), the Commission concluded
that he was eligible at the time of his submission and certified his eligibility
for funds.

Another eligibility issue the Commission has faced involves the certification
of candidates who have violated the law in the past. Although the statute
does not specifically address this issue, the Commission does have an obligation
to ensure that tax money is not misused.24
Recognizing this obligation, the Commission rejected Lyndon LaRouche's 1984
threshold submission, based on violations related to his 1980 publicly funded
campaign. Mr. LaRouche subsequently paid an outstanding civil penalty and
made the required repayments of public funds to clear his 1980 campaign.
The Commission then certified his eligibility for 1984 matching funds.

Based on this experience, the Commission promulgated new regulations
in 1987 codifying its intention to consider all relevant information in
its possession, including a candidate's past actions in previous publicly
funded campaigns, when determining a candidate's eligibility for matching
funds.25

The Commission invoked this provision to reject Mr. LaRouche's 1992 threshold
submission. The Commission cited the candidate's past abuses of the public
funding law, his status as an imprisoned, convicted felon, and the agency's
obligation to ensure that tax money is not misused, as the basis for its
finding. Mr. LaRouche argued that the agency's actions were contrary to
the statute and appealed the decision to the U.S. Court of Appeals.26

The FEC has encouraged Congress to clarify the eligibility requirements
to ensure that candidates who have been convicted of a willful violation
of the public funding laws will not be eligible for future funding. The
Commission believes that public confidence in the system would be compromised
if such candidates could receive public funding. (See
Appendix 2.)

Matching Fund Submissions
Once the Commission certifies the eligibility of candidates, they may submit
requests for matching funds. The agency's Audit Division staff reviews these
submissions to ensure that the candidates receive only those funds to which
they are entitled. This labor-intensive review process has strained agency
resources, despite markedly improved Commission efficiency.

In the 1976 election cycle, the newly formed Commission's 28 auditors
worked nights and weekends to meet their deadlines. At times, the Commission
pulled all available staff from other agency projects to help review matching
fund submissions. In addition, the Commission enlisted the services of six
staff employees of the General Accounting Office and an average of eight
temporary employees.

These measures became necessary, in part, because staff were conducting
100 percent, item-by-item reviews of all matching fund submissions. Although
the agency met its statutory obligations during this period, the Commission
soon recognized that a 100 percent review of each submission was unworkable
and, as a result, began to use statistical sampling procedures.

In 1979, the Commission asked the accounting firm Ernst & Whinney
to review the agency's certification procedures. Based on the firm's findings,
the Commission adopted a Probability Proportional to Size (PPS) statistical
sampling method and increased its use of computers to process submissions
more efficiently.27

Expenditure Limits
To be eligible for matching funds, candidates must agree to limit their
spending to specified amounts (discussed in the "How
the Matching Fund System Works" section of this chapter). Primary
candidates are subject to both state-by-state limits and to an overall,
national ceiling. These limits have presented challenges both for the Commission
and for the Presidential campaigns.

Although the limits are indexed to inflation,
some campaigns have argued that the ceilings are too low. Since 1980, many
potential Presidential candidates have established political action committees
(sometimes referred to as Presidential leadership PACs), ostensibly to support
various federal and nonfederal candidates.28
While these committees have, in fact, contributed to such candidates, many
observers contend that these PACs are actually formed to benefit the Presidential
aspirants who sponsor them.29 They argue that
the PACs often incur expenses that lay the foundation for a subsequent campaign
and build the potential candidate's name recognition and support base. A
PAC might, for example, pay the potential candidate's travel expenses or
help compile a donor list that could later be used in the campaign. In addition,
the PAC might employ key political personnel who later move to the Presidential
campaign staff. Critics maintain that these PAC expenditures represent one
way of circumventing the spending limits. If the PAC's sponsor becomes a
candidate, however, such expenditures may be considered "testing the
waters" activity and, as such, count against the limits.30

Some critics also contend that potential candidates have used "draft
committees" (independent groups formed to encourage an individual to
seek office) to raise and spend funds outside the law's limitations and
prohibitions.31 Several courts have held that
such pre-candidacy activity is permissible and does not count against the
spending limits because the draft committees are not raising or spending
funds to support a "candidate" for federal office. Instead, they
are spending funds to support an individual who may or may not become a
candidate in the future. As a result, they are not "political committees"
within the scope of the statute.32 The Commission
has recommended, however, that Congress amend the statute to bring these
committees within the agency's regulatory purview to ensure public disclosure
and to avoid possible circumvention of the spending limits. (See
Appendix 2.)

Spending by delegate committees (groups formed to support individuals
campaigning to become delegates to their party's Presidential nominating
convention) has generated similar concerns regarding the expenditure limits.
Commission regulations permit a delegate committee to spend unlimited amounts
to prepare and distribute certain campaign materials (such as pins, bumper
stickers and yard signs) that refer to a Presidential candidate.33 These expenditures are not attributable to the Presidential
spending limits unless the delegate committee is controlled by or otherwise
affiliated with the Presidential campaign. If a delegate committee is affiliated
with a Presidential campaign, its expenditures do count against the spending
limits. In 1984, for example, the Mondale campaign did not count expenditures
made by several delegate committees against the spending limits. A Commission
investigation, however, revealed that the delegate committees were affiliated
with the Mondale campaign, and that their spending caused the campaign to
exceed the expenditure limits. As a result, the campaign was required to
pay a total of $398,140 in payments and penalties related to delegate activity.34 The Commission subsequently revised its regulations
to clarify the criteria used to determine affiliation between a delegate
committee and a Presidential campaign. Since that time, delegate spending
has generated considerably less controversy.

While some campaigns may have sought legal
ways to spend beyond the campaign limits, the essential administrative and
enforcement problem for the Commission has been to monitor the state-by-state
limits. These limits, based on each state's voting age population, were
intended to prevent candidates from focusing only on large, delegate-rich
states. Over the years, however, the timing of elections has become at least
as important to campaigns as the number of delegates at stake. Iowa and
New Hampshire, the first two states to hold elections, have relatively small
populations and, consequently, low spending limits. Presidential campaigns,
however, typically view these states as important momentum-builders and
thus want to spend heavily. To avoid the restriction of the state limits,
campaigns have often devised complex schemes to reduce amounts allocated
to the Iowa and New Hampshire limits. Some, for example, have established
campaign offices in neighboring states in hopes of excluding the related
expenditures from the Iowa or New Hampshire limit. The Commission, in turn,
has had to devote considerable resources to monitoring these kinds of activities
in order to determine whether campaigns have exceeded state limits and to
enforce any violations discovered.

The Commission has grappled with this problem for many years. In 1991,
the Commission amended its regulations to simplify and liberalize the process
of allocating expenses to the state spending limits. Under the revised rules,
expenses are allocable only if they fall within one of five specific categories:
media expenses, mass mailings, overhead expenses, special telephone programs
and public opinion polls.35 By contrast, previous
rules had required allocation of all expenses unless an expense was covered
by a specific exemption. The rules also permit primary campaign committees
to treat up to 50 percent of their allocable expenditures for a particular
state as exempt fundraising costs and thus exclude them from the state spending
limit.36

Despite the benefits these regulatory changes may yield, the Commission
recommends that Congress eliminate the state-by-state limits. The Commission
believes that this change would benefit all parties concerned: relieving
a significant accounting burden for campaigns and an equally difficult audit
and enforcement task for the Commission. Moreover, based on the agency's
experience, the change would have little material impact on the electoral
process. Candidates would still be subject to the national expenditure limit,
which, incidentally, is less than the sum of all state limits combined.
(See Appendix 2.)

Ineligibility: Winding Down the Campaign
Once declared eligible for matching funds, a candidate may continue to receive
payments until his or her date of ineligibility. Thereafter, a candidate
may receive additional funds only to pay off campaign debts and to wind
down the campaign.

Under the statute and Commission regulations, primary candidates become
ineligible to receive matching funds on the earliest of the following dates:

30 days after the candidate fails to receive 10 percent of the votes
cast in two consecutive primary elections (unless the candidate receives
20 percent or more of the vote in a subsequent primary);

The date the candidate publicly withdraws from the race;

The date on which the candidate notifies the Commission, or the Commission
determines, that the candidate has ceased to campaign actively in more
than one state;37 or

The date on which the party nominates its candidate at the national
convention.38

Once candidates become ineligible, they may, nonetheless, continue to
receive matching fund payments to retire debts incurred prior to their date
of ineligibility.39 Such matching payments
are made only if the sum of private contributions plus matching funds does
not equal or exceed the qualified debt reported on the candidate's date
of ineligibility.

Commission regulations also permit campaigns to receive additional matching
funds to pay "winding down" expenses incurred after the date of
ineligibility.40 These expenses include the
costs associated with FEC audits and fundraising to retire debts. Some observers
believe that the prospect of additional matching funds encourages campaign
lawyers and accountants to contest the Commission's audit and enforcement
findings. This practice has been criticized as providing a monetary disincentive
for campaigns to conclude business and terminate their committees.

Others, however, see this as part of the Commission's obligation to grant
due process of law to the committees it audits. By providing public funds
to pay "winding down" expenses, the Commission ensures that committees
will have ample opportunity to present their arguments without financial
impediment.

Audits and Enforcement
The Commission has faced persistent criticism regarding the timeliness of
its Presidential audits and related enforcement matters (Matters Under Review
or MURs). Despite the agency's efforts to improve, audits have often taken
two to four years to complete, and related MURs, sometimes longer.

Primary election audits and MURs have typically taken the longest to
complete, because they are the most complex. Ensuring compliance with all
of the requirements of the matching fund program--in effect, protecting
the public purse--is a particularly time consuming task.

Added to this problem is the Commission's obligation to grant due process
of law to the committees it audits and to ensure their right to confidentiality.
Meeting this obligation invariably delays the processing of both audits
and MURs. In the audit process, for example, the Commission must give committees
an opportunity to respond both to the interim audit report and to the final
audit report. (See page 8.) Similarly, in enforcement,
the Commission must provide respondent campaigns with an opportunity to
present their case, and attempt to reach a conciliation agreement with them,
before releasing MUR findings to the public.

Balancing all of these responsibilities-- protecting the public purse,
ensuring due process of law for campaigns and executing timely disclosure
of audit and MUR findings-has proven to be one of the most difficult challenges
to the Commission. Nevertheless, the agency has sought ways to accelerate
the release of audits while still ensuring compliance with the law and protection
of campaigns' legal rights. In 1979, for example, the Commission asked Arthur
Andersen and Company and Accountants for the Public Interest (API) to assess
the agency's audit procedures. Based on their findings, the Commission revised
many of its procedures, substantially reducing the time needed to complete
audits and release them to the public.41 More
recently, in 1991, the agency revised its regulations, adjusted its audit
procedures, expanded its use of technology and increased staffing to further
hasten the completion and disclosure of Presidential audits and MURs. Some
of the most significant changes:

Expanded disclosure to include all audit findings in the publicly released
audit report, including those that might later be subject to enforcement;

Placed limits on the extensions of time granted to committees responding
to audit findings;

Required committees being audited to provide records upon request or
face a Commission subpoena;

More timely disclosure of audit findings will enhance compliance with
the law. Enforcement of the statute relies, in part, on public disclosure.
Negative publicity can be a strong deterrent. Without timely disclosure,
however, the impact of negative publicity and the incentive to comply with
the law diminish. Thus, the Commission believes its efforts to expedite
the release of Presidential audit reports will add "bite" to the
enforcement process and, in turn, encourage compliance.

While the Commission anticipates that the steps it has taken will speed
up the audit and enforcement process, the agency believes that legislative
action could improve the situation even more. For example, eliminating the
state-by-state spending limits and combining the current "fundraising
limit" with the overall spending limit would greatly reduce the time
and resources the Commission devotes to primary election audits. (See Appendix 2.)

1. 26 U.S.C. Sec.9033(b) and 9034(a).

2. The national spending limit is $10 million
increased each election cycle by a cost-of-living adjustment (COLA). In
1992, that limit was $27.62 million. Each state's spending limit is the
greater of $200,000 plus COLA or $.16 times the state's voting age population.
In 1992, the lowest state limit was $552,400. 2 U.S.C. Sec.441a(b)(1)(A).

3. 26 U.S.C. Sec.9033(a) and 9035(a).

4. 26 U.S.C. Sec.9036 and 9037(b).

5. All money raised during the year before
the election and during the election year is potentially matchable.

6. 26 U.S.C. Sec.9034, 9036 and 9037(b).

7. In order to be eligible for public funds,
candidates must agree to keep certain records and furnish them to Commission
auditors. 26 U.S.C. Sec.9033(a).

8. 11 CFR 9038.1.

9. The Commission may issue addenda to final
audit reports based on follow-up fieldwork.

10. 26 U.S.C. Sec.9038.

11. 11 CFR 9038.2(b)(2). Amounts received
in excess of a candidate's entitlement must be fully repaid.

12. 11 CFR 9038.2(c)(2) and (3).

13. The basis for the Commission's final
determination is set forth in a statement of reasons prepared by the Office
of General Counsel.

17. In 1974 dollars, the original $100,000
threshold would have been only $36,205 in 1992.

18. The requirement that candidates be affiliated
with a political party has raised constitutional questions. Some have argued
that it discriminates against independent candidates. For a discussion of
this issue, see Chapter 2.

19. For purposes of 11 CFR Sec.9033.2(b)(1),
"political party" means an association or organization that nominates
a candidate for President, and has "a procedure for holding a primary
election...for nomination to that office."

20. The Commission has applied these same
criteria to other third party candidates. In 1992, for example, Lenora Fulani
(New Alliance Party) and John Hagelin (Natural Law Party) qualified for
matching funds.

21. 26 U.S.C. Sec.9033(c)(1)(B).

22. It should be noted that the 10 percent
rule applies only to primaries, not to caucuses.

30. Commission regulations define testing
the waters expenditures as "[p]ayments made solely for the purpose
of determining whether an individual should become a candidate. . . . If
the individual subsequently becomes a candidate, the payments made are subject
to the reporting requirements of the Act." 11 CFR 100.8(b)(1).

36. The statute exempts a percentage of a
campaign's fundraising expenses from the definition of "expenditure."
2 U.S.C. Sec.431(9) (B)(vi). Amounts excluded as exempt fundraising costs
at the state level, when added to amounts excluded at the national level,
may not exceed 20 percent of the national spending limit.

37. A candidate may re-establish eligibility
by resuming active campaigning in more than one state.

38. 26 U.S.C. Sec.9033(c) and 11 CFR 9033.5.

39. 26 U.S.C. Sec.9033(c)(2).

40. 11 CFR 9034.4(b)(3).

41. As part of these changes, the Commission
separated the audit and enforcement processes.